Centaline’s Shih faces a two-front war ahead of planned IPO

Well, it seems to be official now that Centaline Property Agency will launch an initial public offering within a year.

Founder Shih Wing-ching indicated to group newspaper affiliate AM730 that he would like to raise as much as HK$2.5 billion from a listing of the property agency in Hong Kong.

The main reason why he is flagging the IPO plan is this: extracting revenge on rivals.

By building a war-chest via listing, Shih wants to take on new rivals such as 591 and Soufun that have engaged in “irrational” price competition and dented Centaline’s premier position in the market.

But to make the IPO happen, the tycoon has to overcome one problem first: Winning the consent of Centaline’s co-founder Danny Wong Man-yin, who has been resisting a share float for at least 16 years.

That said, Shih may now have higher chance to get it done. That is because the founders’ stakes are worth much more now and there is thus a bigger incentive to cash out.

The IPO plans were first revealed by Centaline chief executive Lai Ming-kai, who told an industry forum that his company’s valuation could top 60 billion yuan (HK$75 billion) based on the profitability of Centaline China and the still sky-high valuation of the A-shares market.

Centaline China was said to earn 7.5 billion yuan in commission with its 45,000 staff and 2,200 branches.

Too good to be true?

Chairman Shih has now come up with a more realistic valuation of HK$10 billion, taking into account that his company made HK$800 million with an average of 12.5 price-earnings ratio in Hong Kong.

But like other IPOs, it matters more what it will make than what it has already achieved.

Shih was adamant in saying the listing would be a strategic answer to new rivals such as 591.com and Soufun who are undercutting prices even to the extent of actually not making any money on the deals.

“It is like a war of attrition – they want to kill me (Centaline) in a short period,” said Shih. “If I can raise capital in the market, and there will be opening up for more capital inflows, they would probably be more conservative going forward.”

Shih noted that in one instance, a Centaline shop was circled by 10 rivals “because they wanted to marginalize us even if it meant that they would have to take some losses.”

In another instance, the rivals were accused of hiring mainland agents at 100 percent premium, giving them 5,000 to 6,000 yuan per month basic salary (compared to the usual 2,000 to 3,000 yuan per month), and a much higher commission rate of 40 to 85 percent (compared to the prevailing norm of 10 to 35 percent).

Shih stressed that he did not want any price-war, or to burn cash. He also said that he has no mergers and acquisitions ambitions, and that he just wants to maintain a fair market share.

But to realize the listing plan, Shih needs to convince co-founder Danny Wong, who has mostly been a dormant partner with a 45 percent stake since the agency was set up in 1978.

Shih believes the partner may be more open now to a listing, given that the market situation has changed.

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